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UNREGISTERED PARTNERSHIP FIRM INTO PRIVATE LIMITED COMPANY: From Unregistered to Empowered!

This article explores the legal framework for transitioning an unregistered partnership firm into a Private Limited Company in India. It explores into the key considerations, processes involved, and advantages associated with this conversion. The article sheds light on the crucial differences between registered and unregistered partnerships, emphasizing the implications for business growth, liability protection, and access to formal credit channels.

INTRODUCTION

According to the Indian Partnership Act 1932, a partnership can be formed by way of an oral agreement or a written agreement. if the partnership deed is in the written form but have not been registered with the Registrar of Firms. These firms are considered to an unregistered partnership firm. Section 69 of the Indian Partnership Act,1932 talks about the effect of non – registration. The unregistered partnership is valid but there is limitation between the partnership.

Private Limited Company is the company that is owned by the shareholders. The liability of each shareholder is limited to the original value of the shares issued to the shareholder. And when the Private limited company is limited by guarantee, it has members who act as its guarantors. These members support the company in times of trouble.

“Section 2(68) of the Companies Act 2013 defines a private company as:

“Private company” means a company that has a minimum paid-up share capital as may be prescribed and which, by its articles, —

  • Restricts the right to transfer its shares;
  • Except in the case of One Person Company, limits the number of its members to two hundred.
  • Prohibits any invitation to the public to subscribe to any company securities.”

CAN UNREGISTERED PARTNERSHIP FIRM CONVERTED IN TO PRIVATE LIMITED COMPANY?

The unregistered partnership firm can be converted into private limited company. Under section 366 of the Companies Act, talks about the entities capable of being registered. The section deals with the registration of unregistered entities. It states that companies can only register as a company limited by shares if they have a set amount of share capital and the company is owned by shareholders.

In 2018 Ministry of Corporate Affair has brought the Companies 2nd Amendment Rules, 2018. The amendment was made that entities having two or more members to get them registered under the act either as company limited by guarantee, company limited by shares or unlimited companies. Entity that can convert into company under section 366 are –

  • Any Partnership Firm,
  • LLP,
  • Cooperative Society,
  • Society,
  • Any other business entity formed under any other law for the time being in force.

WHY SHOULD YOU CONVERT A PARTNERSHIP FIRM TO A PRIVATE LIMITED COMPANY?

  • Limited Liability is a major advantage. In a partnership, partners are personally liable for the firm’s debts. This means that if the business cannot meet its obligations, creditors can come after your personal assets. A private limited company offers limited liability protection. Shareholders’ liability is limited to the amount of their investment in the company.
  • Partnership firms typically rely on personal funds or bank loans for capital. Private limited companies can raise capital more easily by issuing shares. This allows them to bring in new investors and expand their business ventures.
  • A partnership firm dissolves if a partner dies, leaves, or becomes bankrupt. A private limited company has perpetual succession, that means company continues to exist even if there are changes in ownership. This can make it more attractive to investors and help to build long-term business relationships.
  •  Private limited companies often have a more professional image than partnerships. This can be helpful in attracting customers and clients.
  •  Transferring ownership in a private limited company is more straightforward than in a partnership. Shares can be easily bought and sold.

ADVANTAGES OF PRIVAYE LIMITED COMPANY

  • Shareholders have limited liability.
  • The company is a separate legal entity, which can help with expansion and diversification.
  • No capital gains tax is levied when assets are transferred from the firm to the company.
  • Private limited companies are often seen as more stable, which can help attract clients and investors.
  • The partners’ existence is not dependent on other partners.
  • There is no restriction on the number of shareholders, which can make it easier to raise funds.

DISADVANTAGES OF AN UNREGISTERED PARTNERSHIP FIRM

  • Unregistered firms lack legal recognition. As per Indian Partnership Act, they cannot sue or be sued in their own name. If a customer fails to pay a debt or there is a breach of contract, the firm cannot take legal action to recover what is owed.
  • Partners in unregistered firms have limited options for resolving disputes.
  • An unregistered firm cannot sue third parties, third parties can still sue the firm. This means the partners’ personal assets are at risk if the firm cannot meet its obligations.
  • Unregistered firms are not recorded in any public registry. This can make it difficult to build trust with potential customers and business partners who may be hesitant to deal with an unrecognized entity.
  • Unregistered firms may not be eligible for certain tax benefits or other advantages available to registered businesses.

STEPS TAKEN BEFORE THE CONVERSION OF THE UNREGISTERED PARTNERSHIP FIRM INTO PRIVATE LIMITED COMPANY

  • Holding of meeting for consent of majority of partners.
  • Authorizing two or more partners to take all actions necessary for conversion.
  • If there is any secured creditor their consent must be taken.
  • There must be a clause in the Partnership deed for Conversion of firm into company as and when needed, if the same is not available then the deed needs to be amended for addition of that clause.
  • There should not be revaluation of the assets of the Partnership firm in the previous preceding three years.
  • Shareholding pattern will remain same as that of the partners’ capital ratio. Registration will not affect the rights/liabilities of the company in respect of deeds done before registration of company.

PROCESS OF CONVERTING THE UNREGISTERED PARTNERSHIP FIRM INTO PRIVATE LIMITED COMPANY

The process of converting an unregistered partnership into a company can be done with the Registrar of Companies (ROC). The process of converting unregistered partnership firm into Private limited company is –

  • Conducting a meeting of the partners for the Conversion of the Partnership Firm into a Private Limited Company. To authorize two or more partners to take all steps required and to execute the conversion process along with the documentation.
  • Apply For Digital Signature Certificate (DSC) and Director Identification Number (DIN) for All Proposed Directors and Shareholders of The Company.
  • File an application in the Reserve Unique Name form on the MCA website to get the Incorporation done for the proposed company after conversion.
  • A Partnership firm can apply for the same name, provided the name should be unique as per the rules of the Companies Incorporation Rules 2014 and subject to the availability of the name. The proposed director or shareholder shall provide the necessary attachments along with the proposal for the conversion of the partnership firm.
  • File Form URC-1 within 30 days of name approval along with the necessary documents in the form of attachments with ROC.
  • Publish an advertisement as per section 374(b) of the Companies Act, 2013 firm opting for Incorporation under the provision of Part I of Chapter XXI shall publish an advertisement about Incorporation.
  • Once the Name and E-FORM URC-1 are approved by the Registrar, the applicant company is required to draft the Memorandum and Articles of Association.
  • If the Registrar is satisfied with the documents and information filed by the applicants. The Registrar shall issue a COI (Certificate of Incorporation) to the applicant company.

CONCLUSION

Converting an unregistered partnership to a Private Limited Company provides several benefits such as limited liability protection, tax benefits, etc. Converting from an unregistered partnership firm to a Private Limited Company represents a significant step towards empowerment and growth for businesses in India. Through the process outlined under the Companies Act 2013, firms can attain limited liability, enhance their legal status, and unlock various advantages associated with formal incorporation. Through this conversion, businesses can secure their assets, attract investors, and pave the way for sustainable expansion.

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